First UK deflation in over half a century

The Bank of England headquarters, Threadneedle Street

The UK has experienced negative inflation for the first time since the 1960s, but both the government and the Bank of England deny that it is a sign of persistent deflation to come.

Office for National Statistics (ONS) figures released today show that inflation in the year to April 2015 decreased by 0.1%, meaning that the UK has experienced its first period of annual deflation – or negative inflation – in 55 years.

The consumer price index (CPI) became the official measure of UK price inflation in 1996, but estimates based on comparable historic data places the last period of negative annual consumer price inflation at March 1960.

In its last quarterly inflation report, released earlier this month, the Bank of England warned of the possibility of temporary negative deflation in the near future. They also noted, however, that there was “little sign” of widespread and persistent deflation that could have an adverse economic effect.

The Chancellor of the Exchequer, George Osborne, echoed these sentiments today, insisting that this should not be mistaken “for damaging deflation”, and that falling living costs were in fact good news for Britain.

According to the ONS, falling fuel and food costs have contributed towards static inflation over the past couple of months. Though the cost of fuel is now rising month-on-month, prices are still lower than this time last year.

The ONS also notes that rising air and sea fares, which are normally captured in April’s inflation figures due to the Easter holidays, were not fully included in this month’s release due to Easter falling earlier than normal.

Problems with long-term deflation

Deflation can become problematic for an economy if it is persistent and widespread, occurring across all goods and not just a select few outliers. Consumers, knowing that prices are falling, will defer many purchases, resulting in reduced demand and prices falling further. This leads to the kind of ‘deflationary spiral’ that last affected the UK in the 1920s and 30s.

The Bank of England can attempt to control deflation by setting interest rates lower, encouraging spending rather than saving and helping to boost prices. The low inflation seen during 2015 has contributed to the base rate remaining at its all-time low of 0.5% for longer than expected, resulting in record low mortgage rates and increased demand for properties.

Because of strong wage growth and falling household debt, the Bank of England believes that there is “little evidence of consumers delaying purchases”, and believe that most inflationary measures are “broadly consistent” with the target of 2%. As such, long-term deflation in the UK currently looks unlikely.

This information should not be interpreted as financial advice. Mortgage and loan rates are subject to change.